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  • Co-owners of an investment property

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    A co-owner of an investment property is regarded as an investor who is not carrying on a rental property business, either alone or in conjunction with the other co-owners. This is because of the limited scope of the rental property activities, and the limited degree to which a co-owner actively participates in rental property activities.

    Joint tenants must divide the income and expenses in accordance with their legal interest in the property. With joint tenancy, each joint tenant holds an equal interest in the property. A partnership agreement, either oral or in writing, cannot change this.

    Example
    Joint tenants

    Mr and Mrs Johnson are joint tenants in an investment rental property. Their activity is insufficient for them to be characterised as carrying on a rental property business. In the relevant year, Mrs Johnson telephones the ATO and asks if she can claim 80 per cent of the rental loss. Mrs Johnson says she is earning $67 000 a year, and Mr Johnson is earning $31 000. Therefore, it would be better if she claimed most of the rental loss, as she would save more tax. Mrs Johnson thought it was fair that she claimed a bigger loss because most of the expenses were paid out of her wages. Under a partnership agreement drawn up by the Johnsons, Mrs Johnson is supposed to claim 80 per cent of any rental loss.

    Mrs Johnson was told that where 2 people are joint tenants in a rental property, the net rental loss must be shared in accordance with their legal interest in the property. Therefore, the Johnsons must each include half of the total income and expenses in their tax returns.

    Any agreement that the Johnsons might draw up to divide the income and expenses in proportions other than equal shares has no effect for income tax purposes. Therefore, even if Mrs Johnson paid most of the bills associated with the rental property, she would not be able to claim more of the rental property deductions than Mr Johnson.

    Tenants in common must also divide the income and expenses in accordance with their legal interest in the property. However, with a tenancy in common, the tenants in common may hold different proportionate interests in the property. A partnership agreement, either oral or in writing, cannot change this.

    Example
    Tenants in common

    In the example above, if the Johnsons held their property interest as tenants in common in equal shares, Mrs Johnson would still be able to claim only 50 per cent of the total property deductions.

    However, if Mrs Johnson's legal interest was 75 per cent and Mr Johnson's legal interest was 25 per cent, Mrs Johnson would be required to include 75 per cent of the income and expenses on her tax return and Mr Johnson would be required to include 25 per cent of the income and expenses on his tax return.

    If you don't know whether you hold your legal interest as a joint tenant or a tenant in common, read the title deed for the rental property.

    Example
    Multiple property owners who are not partners at general law

    The Tobins own, as joint tenants, 2 units and a house from which they derive rental income. The Tobins occasionally inspect the properties and also interview prospective tenants. Mr Tobin performs most repairs and maintenance on the properties himself, although he generally relies on the tenants to let him know what is required. The Tobins do any cleaning or maintenance that is required when tenants move out. Arrangements have been made with the tenants for the weekly rent to be paid into an account at their local bank. Although the Tobins devote some of their time to rental income activities, their main sources of income are their respective full-time jobs.

    The Tobins are not partners at general law-they are only co-owners of several rental properties. Therefore, they must each include half of the total income and expenses on their tax returns-that is, in accordance with their legal interest in the properties.

    For more information, read the following section, Partners at general law

    Last modified: 28 Jul 2003QC 16187